The Impact of Government Participation in Ecological Championship on Heavily-Polluting Corporate Earnings Management: Evidence from China’s National Civilized City Award

Abstract

This study investigates the response of heavy-polluting firms to the political costs associated with local government participation in the ecological championship, with a specific focus on China’s National Civilized City Award. Employing the fourth national civilized city selection as a quasi-natural experiment, the results reveal that heavy-polluting firms in cities with the prestigious National Civilized City Award title engage in income-decreasing earnings management to respond to rising political costs resulting from the National Civilized City Award campaign. Our findings are robust across various sensitivity analyses. Furthermore, we identify that the impact of the National Civilized City Award campaign on corporate earnings management is particularly pronounced among sub-samples characterized by non-state ownership, high visibility, and strong incentives for promoting local officials. Our study further elucidates that the increased political costs faced by heavy-polluting firms can be attributed to the local government’s efforts to subject them to more stringent environmental enforcement to pursuing the honor of National Civilized City Award. This study contributes to the existing literature on the political cost hypothesis and provides a new perspective for understanding the impact of environmental regulation on corporate.